If you are an angel investor, that means you are putting your money into a startup business. As the name suggests, the act almost feels benevolent seeing as the company has no proven track record to guarantee you will get any return. But you probably are not making this investment out of altruism.
Angel investors stand to earn big, and that is something that is attracting a lot of people. The Wall Street Journal cites data from PitchBook which states that from the start of 2021 up until September of that year, investors put around $2.7 billion into angel investments.
For comparison, that same dollar amount is how much angel investments saw during the entirety of 2019, prior to Covid.
The allure is clear, as successful startup businesses can lead to angel investors making their money back tenfold. However, the fact is most startups ultimately fail, meaning there is a high likelihood of angel investors losing their money.
So why take the gamble?
For starters, angel investors legally need to have enough income that they are expected to know how to manage their money. To even consider this kind of investment, you either need an annual income over $200,000 or a net worth of over $1 million. So even if you lose money, it should not be devastating to your finances.
Angel investments also require patience, as it can take ten years or more for the startup to sell or go public, which is when you will know if you are making money. This is not some spur-of-the-moment big bet to try and make money fast.
Fred Hubler, Chief Wealth Strategist for Creative Capital Wealth Management Group which services wealthy families in 28 states and specializes in retainer-based planning and alternative investment strategies, likes private equity of more established companies over the angle investors.
According to Hubler, the private equity firms his clients use tend to buy slightly more established companies and turn them around versus investing in early-stage, angle-level companies. “For our more adventurous clients, said Hubler, “being an angel investor can be a fun hobby but we don’t like to see too much of their net worth in that asset class. Traditional private equity is one of the largest asset classes for the larger foundations like Harvard and Yale and we tend to like the way they think.”
Investors compare angel investments to being a bit like playing the lottery. You will often make more than one investment at a time, fully expecting most to fail. But angel investors accept that, knowing it only takes one project to make it big to make it all worth it.
If you are curious for more details about angel investments, read further at The Wall Street Journal by clicking here.
Want to know if you’re on the right path financially? Fred Hubler’s Second Opinion Service (SOS) is a no-obligation review with Creative Capital Wealth Management Group‘s Chief Wealth Strategist.
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